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Chapter 8 Risk and Return

The probability distribution of the rate of return on Monotech Limited is as follows :

Rate of Return Probability

5% 0.2

15% 0.4

25% 0.4

(i) What is the expected rate of return ?

a. 15%
b. 16%
c. 14%
d. 17%
e. None of the above

Working : 0.2 x 5 + 0.4 x 15 + 0.4 x 25

1 + 6 + 10 =17%

(ii) What is the standard deviation of the rate of return?

a. 7.48%
b. 6.56%
c. 8.14%
d. 5.25%
e. None of the above

Working :
Σpidi2 = 0.2 (5 – 17)2 + 0.4 (15 – 17)2 + 0.4 (25 – 17)2

= 0.2 x 144 + 0.4 x 4 + 0.4 x 64

= 28.8 + 1.6 + 25.6

= 7.48%

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The probability distribution of the rate of return on Intech Limited is as follows :

Rate of Return Probability

10% 0.3

20% 0.5

30% 0.2

(i) What is the expected rate of return ?

a. 14%
b. 16%
c. 20%
d. 19%
e. None of the above

Working :
3 + 10 + 6 = 19%
3+

(ii) What is the standard deviation of the rate of return?

a. 6.8%
b. 8.5%
c. 7%
d. 9%
e. None of the above

Working :
pidi2 = 0.3(10-19)2 + 0.5(20-19)2 + .2(30-19)2

= 0.3(81) + .5(1) + .2 (121)

= 24.3 + 0.5 + 24.2 = 49 = 7%

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. The probability distribution of the rate of return on BMC Limited is as follows :

Rate of Return Probability

10% 0.3

15% 0.4

20% 0.3

(i) What is the expected rate of return?

a. 15%
b. 11%
c. 8%
d. 9%
e. None of the above

Working :

0.03 + 0.06 + 0.06 = 15%

(ii) What is the standard deviation of the return?

a. 3.40%
b. 2.90%
c. 3.87%
d. 1.85%
e. None of the above

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Working :

( pidi2 )½ = 0.3( 10 – 15)2 + 0.4 ( 15 – 15 )0 + 0.3 ( 20 – 15 )2 ½

½
= 0.3 x 25 + 0.4 x 0 + 0.3 x 25
½
= 7.5 + 0 + 7.5 = 3.87%

4. The probability distribution of the rate of return on BDM Limited is as follows:

Rate of Return Probability

10 % 0.3

15 % 0.3

20 % 0.4

(i) What is the expected rate of return?

a. 15.5%
b. 19.8%
c. 22.4%
d. 20.5%
e. None of the above

Working:
0.03 + 0.045 + 0.08 = 15.5%

(ii) What is the standard deviation of the return?

a. 4.15%
b. 4.92%
c. 7.85%
d. 1.20%
e. None of the above
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Working:

( pidi2 )½ = [ 0.3 ( 10 – 15.5) + 0.3 ( 15 – 15.5)

2 2
+ 0.4 (20 – 15.5 )2 ] ½

= [ 0.3 x 30.25 + 0.3 x 0.25 + 0.4 x 20.25 ] ½

= [ 9.075 + 0.075 + 8.1 ] ½

= 4.15 %

5. The probability distribution of the rate of return on IMOX Limited is as follows:

Rate of Return Probability

10 % 0.3

15 % 0.5

25 % 0.2

(i) What is the expected rate of return?

(a) 20.2%
(b) 12.3%
(c) 15.5%
(d) 18.5%
(e) None of the above

Working: 3 + 7.5 + 5 = 15.5%

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(ii) What is the standard deviation of the return?

(a) 5.22%
(b) 3.50%
(c) 4.29%
(d) 9.23%
(e) None of the above

Working:

( pidi2 )½ = [0.3 ( 10 – 15.5) + 0.5 ( 15 – 15.5)

2 2
+ 0.2 (25 – 15.5 )2 ] ½

= [0.3 x 30.25 + 0.5 x 0.25 + 0.2 x 90.25 ] ½

= [9.08 + 0.125 + 18.05] ½

= 5.22%

6. The probability distribution of the rate of return on Goldman Limited is as follows:

Rate of Return Probability

60 % 0.2

40 % 0.3

20 % 0.5

(i) What is the expected rate of return?

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(a) 25.0%

(b) 34.0 %
(c) 38.5 %
(d) 40.5 %
(e) None of the above

Working:

0.12 + 0.12 + 0.10 = 34 %

(ii) What is the standard deviation of the return?

(a) 13.50%
(b) 14.52%
(c) 15.62%
(d) 16.38%
(e) None of the above

Working:

(pidi2)½ = [0.2 ( 60 – 34)2 + 0.3 ( 40 – 34)2 + 0.5 (20 – 34 )2 ] ½

½
= [0.2 x 676 + 0.3 x 36 + 0.5 x 196 ]
½
= [135.2 + 10.8 + 98] = 15.62%

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7. The probability distribution of the rate of return on a company’s stock is as

follows:

Rate of Return Probability

20 % 0.3

30 % 0.3

40 % 0.4

(i) What is the expected rate of return?

a. 35.0 %
b. 31.0 %
c. 18.5 %
d. 22.3 %
e. None of the above

Working:
0.06 + 0.09 + 0.16 = 31 %

(ii) What is the standard deviation of the return?

a. 7.82 %
b. 10.34%
c. 12.25 %
d. 8.31 %
e. None of the above

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Working:

(pidi2 )½ = [0.3 ( 20 – 31)2 + 0.3 ( 30 – 31)2 + 0.4 (40 – 31 )2 ] ½

½
= [0.3 x 121 + 0.3 x 1 + 0.4 x 81 ]
½
= [36.3 + 0.3 + 32.4] = 8.31 %

The probability distribution of the rate of return on Monotech Limited is as follows :

Rate of Return Probability

5% 0.2

15% 0.4

25% 0.4

(i) What is the expected rate of return ?

a. 15%
b. 16%
c. 14%
d. 17%
e. None of the above

Working :

0.2 x 5 + 0.4 x 15 + 0.4 x 25

1 + 6 + 10 =17%

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(ii) What is the standard deviation of the rate of return?

a. 7.48%
b. 6.56%
c. 8.14%
d. 5.25%
e. None of the above

Working :

Σpidi2 = 0.2 (5 – 17)2 + 0.4 (15 – 17)2 + 0.4 (25 – 17)2

= 0.2 x 144 + 0.4 x 4 + 0.4 x 64

= 28.8 + 1.6 + 25.6

= 7.48%

9. The probability distribution of the rate of return on Sintech Limited is as follows :

Rate of Return Probability

10% 0.2

20% 0.3

30% 0.5

(i) What is the expected rate of return ?

a. 23%
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b. 14%
c. 21%
d. 19%
e. None of the above

Working :
0.02 + 0.06 + 0.15 = 23%

(ii) What is the standard deviation of the rate of return?

a. 6.23%
b. 5.22%
c. 8.95%
d. 7.81%
e. None of the above

Working :
[pidi2] ½ = [ 0.2(10-23)2 + 0.3(20-23)2 + 0.5 (30-23)] ½

½
= [0.2 x 169 + 0.3 x 9 + 0.5 x 49]

½
= [ 33.8 + 2.7 + 24.5]

= 7.81%

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10.

The probability distribution of the rate of return on ABM Limited is as follows :

Rate of Return Probability

5% 0.2

10% 0.5

15% 0.3

(i) What is the expected rate of return?

a. 10.5%
b. 12.4%
c. 16.0%
d. 8.5%
e. None of the above

Working :

0.01 + 0.05 + 0.045 = 10.5%

(ii) What is the standard deviation of the return?

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a. 4.26%
b. 5.25%
c. 2.80%
d. 3.50%
e. None of the above

Working :

( Pi d i2) ½ = [0.2 (5-10.5)2 + 0.5 (10-10.5)2 + 0.3 (15-10.5)2 ]1/2

= (0.2 x 30.25 + .5 x 0.25 + 0.3 x 20.25)1/2

= (6.05 + 0.125 + 6.075) ½ = 3.50 %

11.

. The probability distribution of the rate of return on Inova Limited is as follows:

Rate of Return Probability

15 % 0.2

20 % 0.5

25 % 0.3

(i) What is the expected rate of return?

a. 18.5%
b. 17.8%
c. 21.4%
d. 20.5%
e. None of the above
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*Copyright © 2015 by McGraw Hill Education (India) Private Limited

Working:

0.03 + 0.10 + 0.075 = 20.5%

(ii) What is the standard deviation of the return?

a. 5.25 %
b. 3.50 %
c. 8.95 %
d. 4.20 %
e. None of the above

Working:

( pidi2 )½ = [0.2 ( 15 – 20.5) + 0.5 ( 20 – 20.5)

2 2
+ 0.3 (25 – 20.5 )2 ] ½

= [0.2 x 30.25 + 0.5 x 0.25 + 0.3 x 20.25 ] ½

= [6.05 + 0.125 + 6.075] ½

= 3.5 %

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12

The probability distribution of the rate of return on Investwise Limited is as follows:

Rate of Return Probability

20 % 0.4

30 % 0.3

25 % 0.3

(i) What is the expected rate of return?

a. 24.5%
b. 20.8%
c. 18.5%
d. 19.2%
e. None of the above

Working:

0.08 + 0.09 + 0.075 = 24.5%

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(ii) What is the standard deviation of the return?

a. 4.15%
b. 3.80 %
c. 4.69 %
d. 7.23 %
e. None of the above

Working:

( pidi2 )½ = [0.4 ( 20 – 24.5) + 0.3 ( 30 – 24.5)

2 2
+ 0.3 (25 – 24.5 )2 ] ½

= [0.4 x 20.25 + 0.3 x 30.25 + 0.3 x 0.25 ] ½

= [8.10 + 9.075 + 0.075] ½

= 4.15%

13. The probability distribution of the rate of return on the equity shares of Levers
Limited is as follows:

Rate of Return Probability

20 % 0.7

50 % 0.1

30 % 0.2

(i) What is the expected rate of return?

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a. 25.0 %
b. 34.0 %
c. 38.5 %
d. 40.5 %
e. None of the above

Working:

0.14 + 0.05 + 0.06 = 25 %

(ii) What is the standard deviation of the return?

a. 16.50 %
b. 21.94 %
c. 9.22 %
d. 12.38 %
e. None of the above

Working:

(pidi2)½ = [0.7 ( 20 – 25)2 + 0.1 ( 50 – 25)2 + 0.2 (30 – 25 )2 ] ½

½
= [0.7 x 25 + 0.1 x 625 + 0.2 x 25 ]

= 9.22 %

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14. The probability distribution of the rate of return on a company’s stock is as

follows:

Rate of Return Probability

10 % 0.6

15 % 0.2

20 % 0.2

(i) What is the expected rate of return?

a. 14.5 %
b. 11.0 %
c. 13.0 %
d. 12.5 %
e. None of the above

Working:
0.06 + 0.03 + 0.04 = 13 %

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(ii) What is the standard deviation of the return?

a. 4.00 %
b. 3.25 %
c. 5.25 %
d. 2.84 %
e. None of the above

Working:

(pidi2 )½ = [0.6 (10 – 13)2 + 0.2 ( 15 – 13)2 + 0.2 (20 – 13 )2 ] ½

½
= [0.6 x 9 + 0.2 x 4 + 0.2 x 49]

= [5.4 + 0.8 + 9.8]½ = 4 %

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